energy tech transfer to China-1985

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Energy Technology Transfer to China

September 1985

NTIS order #PB86-113008


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R ecom m ended C i t a t ion :

U.S. Congress, Office of Technology Assessment, Energy Technology Transfer to ChinaATechnical Memorandum, OTA-TM-ISC-30 (Washington, DC: U.S. Government PrintingOffice, Septem ber 1985).

Library of Congress Cata log Card Number 8 5 - 6 0 0 5 7 0

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402


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Foreword

This technical memorandum responds to requests by the Senate Committee on Bank-

ing, Housing, and Urban Affairs and the House Committee on Energy and Commerce

and its Special Subcommittee on U, S. Trade with China. It is the result of the first phase

of OTAs assessment on Technology Transfer to China, which is scheduled to be com-pleted by the end of 1986. Both committees requested that an interim document on energy

technology be provided because of the immediacy of the agreement on nuclear cooper-

ation and the importance of energy to Chinas modernization plans.

This memorandum examines the opportunities for the transfer of various energy

technologies to China. It reviews the motivations for U.S. companies and other institu-

tions for transferring technology and the vehicles for doing so. It also surveys Chinas

needs for energy technologies and its ability to assimilate them.

Some implications of energy technology transfer are clearly important to U.S. in-

terests. Certain technologies could enhance Chinas ability to compete against the United

States in the world market or contribute to an increased military capability which could

be of concern if relations deteriorate, On the other hand, technology transfer could be

a major element in improving relations between the two countries, as well as an impor-

tant component of increased U.S. trade with China.

Nuclear technology is given special attention in this memorandum because of the

importance of exports to the U.S. nuclear industry, the potential impact on U.S. non-proliferation and strategic goals, and the interest of Congress in the nuclear coopera-

tion agreement.

The memorandum also examines policies for controlling and promoting technol-

ogy transfer to China. It analyzes changes that might improve the effectiveness of these

policies.

The memorandum is based on discussions at a workshop held on April 18-19, 1985,

on five background papers commissioned for this workshop and on OTA staff research.

The five papers and additional information are contained in a separate volume.

OTA appreciates the assistance provided by the workshop participants; reviewersof this document; and the many individuals, companies, and agencies contacted during

the study.

JOHN H. GIBBONSDirector

.,.Il l


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Related OTA Reports

Technology Transfer

q U.S.-Soviet Cooperation in Space.OTA-TM-ST1-27, July 1985. GPO stock #052-O03-O1004-6.

q Technology Transfer to the Middle East.OTA-ISC-173, September 1984. GPO stock #052-O03-O0962-5.

q Technology and East-West Trade: An Update.OTA-ISC-209, May 1983. GPO stock #052-003-00908-l.

q Technology and Soviet Energy Availability.OTA-ISC-153, November 1981. NTIS order #PB 82-133455.

q Technology and East-West Trade.OTA-ISC-101, November 1979. NTIS order #PB 80-119381,

Energy

q New Electric Power Technologies: Problems and Prospects for the 1990s.OTA-E-246, July 1985. GPO stock #052-003-01005-4.

q Nuclear Power in an Age of Uncertainty.OTA-E-216, February 1984. GPO stock #052-003-00941-2.

q Industrial and Commercial Cogeneration,OTA-E-192, February 1983. NTIS order #PB 83-180547.

q Industrial Energy Use.OTA-E-198, June 1983. GPO stock #052-003-00915-3.

q Nuclear Proliferation and Safeguards, Summary.OTA-E-148, March 1982.

q Direct Use of Coal: Prospects and Problems of Production and Combustion.OTA-E-86, April 1979. NTIS order #PB 295797,

NOTE: Reports are available through the U.S. Government Printing office, Superintendent of Documents, Washington, DC 20402,

(202) 783-3238, and the National Technical Information Service, 5285 Port Royal Rd ., Springfield, VA 22161, (703) 487-$650,


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OTA Project Staff for Energy Technology Transfer to China

Lionel S. Johns, Assistant Director, OTA Energy, Materials, and International Security Division

Peter Sharfman, International Security and Commerce Program Manager

Alan T. Crane, Project Director

Martha Caldwell Harris, Senior Analyst

Richard P. Suttmeier, Senior Analyst

Joanne Seder, Analyst

Craig Allen, Research Assistant

A d m i n i s t r a t i v e S t a f f

Jannie Coles Dorothy Richroath Jackie Robinson


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Contents

Page

CHAPTER l: Introduction. ,, ,,, 3

CHAPTER 2: Techn ology Transfer an d U . S.-China Relations ., ... 7

The Foreign Policy Context for TechnologyTransfer, ,. . . . . ., ..,,,....,,, 7

L ong-T erm O ppor tun i t i e s and R i sks . , 8Opportunit ies . . . , 8Risks. . . . . . . . . . . . . ....,,.10

Technology as a Tool of U.S.Foreign Policy . . . . . . . . . . . .......13

CHAPTER 3: Energy Technology Transfers ....17Resources. . . . . . . . . . . . . . .....17Trends in Energy Production and Use... .....19

Petroleum . . . . . ,. ...,19Natural Gas . . . . . . . . . . . . . . . . . . . . . ...,,..19Coal . . . . . . . . . . . . .......20Electricity . . . . . . . . . . . . . . . . . . . . . . . .......20

Projections ..., . . . . . . . ..., ..21Energy Use . . . . . . . . . . . . . . . . . . . ., . .......21

Trends in Energy Technology Transfer .. ...,.22Petroleum Exploration and Production .....22Petroleum Refining and Petrochemicals, ,...23Coal Mining an d Transportation. . . ..,,...24Electric Power . . . . . . . . . . . . .......24Con serv ation . . . . . . . . . . . . . . . . . . . . . . .,...24Soar, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Chinas Problems With Technology Transfer ..25Finance, . . . . . . . . . ..., . . . . . . ..25Manpower, ..., ..., . . . . . . ..., ..., ,26Internal Transfers . . . . . . . . . . . . .......26Decisionmaking . . . . . . . , . . . , . . . . . . . ,27

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . .....28CHAPTER 4: Nu clear Power and the Prop osed

Cooperation Agreement . . . . . . . . . . . . . . . . . ,31Present Capabilities, . . ..., ..., ..., ..., ..33The Role of Imported Technology . . . . .......33Proliferation Concerns ., . . . . . . . . . . . . .......35Other Military Concerns . . . . . . . . . . . . .......38Nuclear Cooperation Agreement. ..,.. ., ...,.39

CHAPTER 5: U.S. Policy: Tools for Controllingand Promoting Energy TechnologyTransfers ., . . . . ..., . . . . . . ..., ..., ..,47

Page

Controls on Nonnuclear Energy Exports ......48The Rationale of U.S. Export Controls. .48Problems With the System ., ....50Possible Improvement in U.S. Export

Controls. . . . ,, 53Congressional Review of Nuclear CooperationAgreement, . . . . . . . . . . . . . . . . . . 54

Promoting Energy Technology Transfers ,,...55Limited Scope of U.S. Promotional

P r o g r a m s . . , , . . . , , , , . . , . , . . . . , , , . . . , , 5 5Selection of Energy Development Projects ..58Possible Improvements in U.S. Promotional

Programs .,,.....,,. . . . . . . . ,,.59Balancing Control and Promotion ,,60

APPENDIX: Nuclear Cooperation Agreementand Supporting Documents . . . . . ...65

List of Tables

Table No. Page

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

Petroleum Production by Region, , . . . , 19Natural Gas Production by Region ,..., 19Coal Production . . . . . . . . . . ..., 20Electric Pow er Prod uction. . . . . . . . . . . . . . . . 20Projected Primary Energy Production. . 22Estimated Values of U.S. Techn ologyTransfer to China . . . . . . . . . . . . . . . . . . . . . 23Nuclear Test Chronology, October1964 to January 1981 . . . . . . . . . . . . 37Export Applications for the PRO . . . . . . . . . . 50Energy-Related Science and Technology

Agreements With China, . . . . . . . . . . . 55U.S. Government-Supported EnergyDepartment Projects in China . . . . . . . . . . . . 57U.S. and Japan ese Trade, Aid, andInvestment in China, 1983 . . . . . . . . . . . . . . . 57

List of Figures

Figure No.

1. Chinas Energy2. Nuclear Policy

Organization

Page

Resources . . . . . . . . . . . . 18Decisionmaking. . . . . . . . . . . . . . . 34

vi i


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Chapter 1


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4

scaling back of Chinese plans in the early 1980s

and were also surprised by Chinas hard bargain-

ing tactics.

The expectations and interests of the U.S. andChinese enterprises directly involved in the trans-

fers, as well the governments and other affected

parties, sometimes diverge. For the U.S. firm withtechnology to sell and for the Chinese firm that

needs the technology, the commercial rationale

for technology transfers may be clear, at least in

the short run. But from a U.S. Government per-

spective, questions of national security are raised,

particularly when the transfers involve technol-

ogies with potential military applications. The po-tential long-term effectscommercial as well as

strategicmust be carefully assessed in develop-ing U.S. export control as well as promotional

policies.

The pending agreement for cooperation in nu-clear energy between the United States and China

embodies many of these policy dilemmas. The

risks as well as the opportunities associated with

possible nuclear technology transfers have poten-

tial implications not only for the United States and

China, but also for global trends in the prolifera-tion of nuclear weapons, Congress has an impor-

tant role to play in reviewing the proposed ac-

cord, and in helping to shape the policy context

for conventional energy technology transfers to

China.

Two congressional committees requested thatOTA provide an interim report on energy tech-nology transfers to China. The Senate Banking

Committee, one of the requesters, plays a lead-

ing role in export policymaking and Members of

the Committee are particularly interested in the

proposed agreement for nuclear cooperation be-

tween the United States and China. The House

Energy and Commerce Committee and its Spe-

cial Subcommittee on U.S. Trade with China haveasked OTA to examine how the U.S. Government

might facilitate energy technology transfers whileat the same time ensuring that national security

interests are upheld.

Because of the keen interest in the area of energy

technology transfers to China on the part of the

requesting committees, OTA turned to these is-

sues in the first stage of a major research project

on Technology Transfer to China that will deal

with a number of technologies. This memoran-

dum is not meant to be definitive. Instead it raisesa number of broader issues concerning U.S.-China

relations that will be analyzed in more depth in

the full report. The major OTA study was initi-

ated in the spring of 1985 and is scheduled for

completion in December 1986,

This memorandum is based on the research ofOTA staff and the proceedings of a 2-day work-

shop h eld in April 1985 that includ ed experts from

academia, industry, and research institutes. The

participants are listed in the front of this memo-randum. The report is designed to present the pol-

icy issues that Congress will confront as it looks

at the long-term risks and opportunities associ-

ated with transferring energy technologies to

China. Five working papers that were commis-

sioned for the workshop an d other documents thatprovide additional information on the subject are

included in a separate volume, available upon re-

quest to OTA.


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Chapter 2

Technology Transfer andU.S.-China Relations


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8

Association of Southeast Asian Nations (ASEAN)

countries fr iendly to the United States view

Chinas modernization with apprehension. The

very success of Chinas modernization poses new

challenges to the U.S.-PRC relationship. Conflict

over trade in textiles is a notable example. WhileChinese leaders stress their enduring commitmentto independence as the cardinal principle in their

foreign policy, they h ave also expressed their view

that technical cooperation with the United States

has not yet reached the desired level. All the

while, China insists that it cannot be bullied by

foreign countries that hope to force political con-

cessions in exchange for advanced technology.7

Despite its growing involvement with foreign

countries and firms, China continues to value self-reliance.

During the past 6 years, expectations for a wid-

ening relationship have run high in the UnitedStates. In spite of considerable achievements,

translating the general objectives of U.S.-China

policy into concrete measures has, at t imes,

proved difficult. U.S. export controls illustrate

these difficulties. The United States loosened itscontrols on exports of dual-use technologies (with

military and civilian ap plications) in 1983 by mov-ing China to category V on the Commodity Con-

trol List (CCL).8 As a result, the process of license .

Chen Muhua, State Counselor and Minister of Foreign Relationsand Trade, made this statement in Prospects for Sine-U. S. Eco-

nomic Relations, Beijing Review, No. 17, Apr. 23, 1984.See Zheng Weizhi, Independence is the Basic Canon An Anal-

ysis of the Principles of Chinas Foreign Policy, Beijing Re}ie\ t,No. 1, 1985.

In 1980 the United States authorized sales to China on a case-by-case basis of items and technolog y on the U.S. munitions list.

review was to be expedited. But, as discussed in

more detail in chapter 5, disagreements continue

both within the U.S. Government and among

Cocom 9 countries about the guidelines for suchexports. U, S. exporters and the Chinese as well

have complained about delays and uncertaintiesin U.S. license reviews. U.S. energy technology

transfers to China have, nevertheless, grown from

an estimated level of $20 to $30 million in 1973-80 to $100 to $125 million in 1980-85.

10

In the wake of a dramatic transformation in

U.S.-China relations during the past few years,

the time may be ripe for a more careful defini-

tion of areas of mutual and competing interest inrelations with China. U.S.-PRC cooperation in

energy development is one area where such a re-

assessment may be particularly timely, Energy

problems are a major constraint on Chinas mod-

ernization program, and the energy sector there-fore is of strategic importance. The United States

has considerable expertise to assist China in de-

veloping its energy resources and may make sig-

nificant gains as a result, In addition to opportu-

nities for benefits, however, there are also risks.Both the long-term opportunities and risks asso-

ciated with energy technology transfers thus must

be evaluated.

Cgyan d strate~ic goodsto the Communist world.

(rhese estimates are found in Wooclard, op . cit., p , 22.

LONG-TERM OPPORTUNITIES AND RISKS

Assessments of risks and opportunities associ-

ated with energy technology transfers hinge on

perspectives concerning trends in Chinese eco-

nomic development and prospects for U.S.-China

relations. During the p ast 30 years there have beendramatic changes in both areas. Whether Chinesereform policies succeed, Chinas ability to absorb

U.S. technology, and the capabilities of Chinas

own R&D system are some of the questions that

influence assessments of opportunities and risks.

Such assessments are also contingent on whether

China is viewed by the United States as a poten-tial ally, a friendly nonallied nation, an unpre-

dictable neutral country, or a potential enemy.

Opportunities

U.S. policies are today predicated on the no-

tion that the United States has much to gain from

transferring energy and other technologies to


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.

9

China. Expanded cooperation in the energy sec-

tor has been seen as a ke y avenue for the United

States to participate in, and even help shape,

Chinas economic modernization. At the same

time, the United States restricts exports of tech-

nologies that have significant military applica-tions, such as certain nuclear technologies and

very powerful computers.

1. Contribution to Friendly Bilateral Relations

Cooperation in the energy sector is a symbolicas well as a practical demonstration of U.S. ex-

pertise and commitment. Because energy devel-

opment is intimately connected with economic

and social change throughout China, it is an areawhere U.S. influence may be particularly impor-

tant. Energy, in other words, holds a key to Chi-

nese economic development, and U.S. technol-ogy can contribute to the modernization process.

The Chinese, furthermore, clearly want U.S. tech-nologies.

Opting out of Chinese energy development

would at best disappoint the Chinese and at worst

cause serious problems in U.S.-China relations.

Other Asian countries could also be affected by

such developments. Japan, for example, expanded

its relationship with China after U. S .-China re-

lations began to improve. A stable, working U. S.-

China relationship is an important element inJapans own strategic policies. In light of these

and other factors, forgoing p articipation in Chinasenergy development hardly seems a viable alter-native for the United States.

2. Trade Op por tun ities

The China m arket may not be th e bonanza once

hoped for, but it is now a significant one, and

holds the potential for expanded imports of energy

equipment, services, and technologies in the years

ahead. In a period of rising U.S. trade deficits,

China offers opportunities for expanded exports.

Unlike many developing countries, China has a

foreign exchange surplus, and although the sur-

] See Denis Simon, Background Paper V, Energy. TechnologyTranster to China: The Downside Risks, prepared for the Officeof Technology Assessment, Nlay 17, 1985, p, 28.

In 1984 [l, S.-Ch]na trade was in balance, with exports from theUnitedStates of $3,4 bllllon an d imp


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riching cross-cultural exchanges. As Chinese tech-

nicians visit U.S. laboratories, assembly lines, and

libraries and as U.S. professionals travel to China,

they have the opportunity to form long-lasting

relationships that forge ties between representa-

tives of this core industry in the two countries.

U.S. firms and organizations involved in Chineseenergy development h ave the opportu nist y to help

China shape its economic future, and possibly fur-

ther improve their technology and perfect their

expertise in international technology transfers.

Risks

The United States stands to gain mu ch in energytechnology transfers to China if these potentialopportunities are realized, but there are also cer-

tain risks or uncertainties that pertain to national

security as w ell commerce that mu st be considered .

1. Diversions to Mili tary Applications

The ultimate risk is that a future China that

may be hostile to the United States would bene-

fit militarily as well as economically from certain

energy-related technologies transferred by theUnited States today. Concerns for Chinese mili-

tary benefits are associated with the transfer of

dual-use technologies (some of the seismic, cali-

bration, and computer technologies used in energy

development) and aspects of nuclear technology

(discussed separately in a later section).

Chinas current leadership appears committed

to domestic economic reform and to opening it-

self to foreign investment. China has stated thatit values cooperation with the United States as

part of this process. It is, however, difficult if not

impossible to predict policy shifts that might oc-

cur a d ecade in the futu re. U.S. policymakers m ust

therefore take into account the possibility that

dramatic shifts could occur, since under such cir-

cumstances we could regret the dual-use transfers

we make today.

We know enough about the organization of

Chinese R&D, and Chinas considerable science

and technology capabilities, not to be carelessabout dual-use transfers. Some Chinese scientists

and engineers who have studied in the United

States will return to serve in Chinas military or

their know-how will benefit military development

indirectly, Over the long run, it is impossible to

compartmentalize technologies in terms of their

impacts on an economy.

In the near term, however, there are a number

of factors that limit the military risks associated

with civil ian energy technology transfers to

China. Many energy technology transfers do not

include sensitive dual-use items, and therefore do

not directly pose problems for U.S. national secu-

rity. Chinas ability to apply such technologies is

also limited by the slow pace of Chinese military

modernization. In the intermediate term, how-

ever, China will be able to absorb increasinglysophisticated dual-use technologies. Therefore, if

economic modernization proceeds apace, over the

longer term Chinas growing technological exper-tise can be expected to make significant contri-

butions to its military.

In theory, the U.S. export control system pro-

vides a mechanism for constraining the transfer

of sensitive technologies, The United States can

and does attach conditions on the transfer of dual-

use equipm ent (leasing, op eration by U.S. citizens)

that limit the diffusion of sensitive technologies

to the military sector. Such controls are costly,

not welcomed by the Chinese, and certainly do

not completely rule out the possibility of diver-

sions, China can also obtain (and reportedly hasin some instances) U.S.-manufactured dual-use

technologies in Hong Kong and third countries.

Another possibility is that d ual-use technologiestransferred to China might fall into the hands of

unfriendly countries. But China today has little

incentive to transfer sensitive technologies to

countries such as Vietnam or the U.S.S.R. because

doing so would create security problems on its

own borders. In addition, U.S. firms set limits on

retransfers through written contracts (which the

Chinese seem to honor) and through their option

to forgo further transfers if violations occur. In

the case of nuclear technology, there are special

problems (discussed below) surrounding retrans-

fers to third countries related to the potential

spread of nuclear weapons.


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2. Geopolitical Risks

If China succeeds in modernizing its economy

through the application of imported technologyand other means, it will be in a position to play

an increasingly important role in Asian politics

and markets. Some observers in ASEAN coun-tries, as well as Taiwan and other Asian coun-

tries, view this prospect with concern. A vibrant

China could exert considerable influence through

nonmilitary means on its neighbors. In light of

traditional animosities and current militar y con-

flict between China and some countries such as

Vietnam, there is a legitimate concern that Chinas

emergence as a regional and even global powercould create new and aggravate old conflicts in

Asia.

There is also a potential for regional conflict

in Asia as China develops its energy resources.

Territorial disputes have impinged on offshore oil

and gas development. There have been reports

that the U.S. firms ARCO and Pennzoil explor-ing for oil in the South China Sea have been har-rassed by Vietnamese gunboats.

13While conflict-

ing territorial claims may not be sufficient to

provoke military conflict, political and militarydisputes between China and Vietnam, for exam-ple, may be played out in a struggle over poten-

tially energy-rich territories.14

Particularl y relevant from the U.S. perspective

is the fact that private companies participating in

joint ventures in China incur investment risks.These firms could suffer financially if China were

to scale back its development plans (as it did a

few years ago). U.S. firms involved in Chinas off-

shore oil and gas development have made large

preliminary investments, indicating considerable

financial risks, but such investment risks are pri-

marily the concern of the firms. The U.S. Gov-

ernmen t, however, insu res some U.S. firms invest-

ing in China against political risks through the

Overseas Private Investment Corporation. The

U.S. Government also provides information to

U.S. investors concerning domestic political and

economic developments in China.

3. China Trade Competition and the Alliance

The United States has commercial interests at

stake in energy technology transfers to China.China is both a significant market and potentialcompetitor. Today, competition among suppliers

for shares of the China market poses more im-

mediate and significant U.S. policy issues than

does Chinas growing role as an exporter of ener-

gy-related commodities, equipment, and services.As firms from many countries compete for sales

in China, supplier governments may be tempted

to provide extraordinary support for domestic

firms, through financing, aid programs, and rep-resentation of business in negotiations. This can

also happen when Cocom members attempt to

manipulate the process to the benefit of their own

domestic firms. While there is room for legitimate

disagreement in many instances about whether or

not such government actions provide unfair ad-

vantages, the result is to raise the stakes of sup-

plier competition.

From the U.S. perspective, these problems are

reflected in debates about Export-Import Bank

financing, U.S. approaches to Cocom, and U.S.

export controls. At stake here, among other

things, is the capability of U.S. firms to competefor sales in the China market.

4. The Terms of Technology Transfer

Intellectual Property

As U.S. firms transfer energy technology to

China there is the potential risk that technology

developed in the United States ma y be appropri-

ated without adequate compensation to the origi-

nator. Chinas recent enactment of a patent law

and recent promulgation of technology transfer

regulations, however, are positive signs of its in-

tent to honor technology transfer agreements. The

law, however, does not cover software and cer-

tain chemical processes, and it is not yet clear howChina will implement the new legislation.

5. China as an Economic Competitor

It does not appear likely that Chinese energy-

related exports will seriously compete with those


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12

from the United States, There is no energy tech-

nology or equipment area in which China will bea significant exporter in the near term. China,

however, is selling small-scale hydropower tech-

nology and m ay be exporting some energy equip-

ment after 1995. In the next century China could

emerge as an exporter of large reactors and coalconversion technologies, but this is only conjec-

ture. More likely, Chinas ability to satisfy its

energy demand through the use of U.S. technol-

ogy will enhance the performance of its economy

generally, and the export sector in particular. Thepossibility of China becoming a comp etitor in cer-

tain industries such as consumer electronics is nolonger far-fetched.

China is already an actor in Asian energy trade,and may become a major energy exporter during

the next decade. Chinese oil exports can help to

offset the dependence on OPEC of some countries

like Japan. At the same time, China will certainly

compete with other countries in Asian energy

markets. To cite one example, both China and

the United States want to sell coal to Japan. Ja-

pan is helping China develop its coal resources

and has long-term coal and oil supply agreements

with China. While China has not met its targets

for coal exports to date, its coal exports will jump

if just one of the major coal development projects

is completed. To cite another example, China is

already exporting more than 500,000 barrels per

day of oil and may increase exports significantl y

du ring the n ext decade .15 Indon esias oil ind ustrysees itself as competing with China in oil sales to

Japan.

No importer of Chinese energy, Japan included,

is likely to become dangerously dependent. 16

But there are r egional dimensions to Chinas emer-

gence as an energy exporter. Chinese energy de-

See Fereidun Fesharaki, et al., Critical Energy Issues in Asia an dth e Pacific (Boulder, CO: Westview Press, 1982), p. 36, for a fore-cast that China will be exporting 500,000 to 1.5 million barrels per

day of petroleum by 1990.

Japan imported 4.4 percent of its total coal imports and 5.2 per-cent of its crude oi ]an d refined products from China in 1983. SeeRichard K. Nanto and Hong Nack Kim, Sin(>Japanese Relations, CRS Paper, November 1984. For a detailed projecti[~n of Chineseenergy production, see Kim Woodard, Devek>pment of Chinas Pe-troleum Industry, prepared fc~r East-West Center \ Vorkshop onChina Energy, Apr. 25-2~, 1Q85.Woodard concludes that it willbe d ifficult for China to sustain the current level of crude and productexports through the end of the decade, let alone increase exportsby significant margins.

velopment may not seriously jeopardize energy

development in other Asian countries, but it will

certainly compete for investment capital and other

resources. A major area of uncertainty is Chinasfuture role in regional markets and institutions, 7

the nature of its integration into the Pacific Basin.

The logical outcome of technology transfers isthat China will more efficiently produce energy,

equipment, and services for both its internal mar-ket and for export. Some U.S. firms may find that

sale of proprietary technolog y through licensing

and patents is their only avenue for participating

in the Chinas energy development. More com-

monly, the U.S. firms that transfer energy tech-nology also sell equipment and technical services.

Over the long run, U.S. firms that transfer energy

technologies will need to further develop these

and other technologies in order to remain com-

petitive.

6. U.S. Policymaking Inadequacies

There are also potential risks stemming from

the U.S. policymaking process itself. Each high-

level U.S. Government mission is challenged to

bring back tan gible eviden ce of success in the form

of new protocols and agreements. At the same

time, disputes among various parts of the U.S.

Government (and even within departments) re-

flect the absence of a clear U.S. strategy on ex-

port controls. The danger is that as U.S. policies

concerning technology tra nsfer are bu ilt on a case-

by-case basis, we may lose sight of overall U.S.goals. Furthermore, there is evidence that U.S.

policy declarations raise Chinese expectationswhich are then dashed at the policy implementa-

tion stage.

7. Technology Transfer Failures

Although there are risks associated with par-

ticipating in Chinas energy development (includ-

ing the possibility that the United States might be

blamed for projects that fail), the risks to the

United States could be even more significant if

China fails to meet its energy development goals.An economically stagnant China could see domes-

tic political instability and might play a hostile

The Asian Development Bank has not admitted China, but theissue is under debate,


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13

role in the Asian region. Foreign technology may

not be the key variable in Chinas energy equa-

tion, but foreign assistance could significantly help

China to meet its goals.

The gains associated with energy technology

transfers app ear clear and compelling, as discussed

above. In contrast, the risks are in some instances

vague and uncertain, particularly over the long

term. But while the gains outweigh the risks asso-

ciated with transferring U.S. energy technology

to China, there are significant risks to be man-

aged. These include th e risk that the d ual-use tech-

nologies (including nuclear) that the United States

transfers to China could be used in ways that pose

security problems for the United States. Intense

competition among supplier firms and govern-

ments to outdo one another in financing also in-volves risks to the U.S. Government. Uncertain-

ties associated with Chinas entry into Asian

energy trade also pose challenges to U.S. policies.

TECHNOLOGY AS A TOOL OF U.S. FOREIGN POLICY

Science and technology have already been used

as tools of U.S.-China policy. Since the Carter

Administration, science and technology have been

highlighted in U.S.-China relations. There has,

however, been no explicit or coherent strategy for

the use of technology as a tool in U.S. policies

toward China.

Identifying the instances where technology has

been an important instrument for U.S. policiestoward China could be a first step in improving

policies. In the face of the opportunities and risks

discussed above, the question now is how tech-

nology can be used more effectively as a tool of

foreign policy.

The ability of the U.S. Government to extract

political or other concessions from China by d eny-ing sales of U.S. energy technologies is quite

limited, even where U.S. firms hold a technologi-

cal lead (oil and gas exploration, for example).This is because Japan and West European coun-

tries are ready and eager alternative suppliers, and

U.S. technological leads (where present) in energy

technologies are not so great that other suppliers

cannot compete.

Sequencing (gradual expansion of trade in tech-

nology as bilateral relations improve and experi-

ence deepens) is another approach that might be

effective if pursued systematically. In some cases,sensitive dual-use technologies may make up only

a minor portion of the dollar value of an energy

development project, but these technologies can

be absolutely critical to the project. Under the ex-

port administration system, decisions to loosen

restrictions on export of the more sensitive energy

technologies are made within the executive

branch, and have oftentimes been controversial.

Interagency reviews and low key dialog with Chi-

nese end-users to check the strength of their com-

mitments to abide by U.S. stipulations, if prop-

erly pursued, can ensure that risks associated with

dual-use transfers have been taken into account

and steps taken to minimize them. But, in prac-

tice, disagreements within and between various

branches of the U.S. Government (and within

Cocom) have precluded the systematic implemen-

tation of a technology sequencing strategy.

Most of the technologies that China seeks to

develop its energy resour ces are not sensitive dual-use technologies. In these areas, technology trans-

fers could serve U.S. interests by contributing toChinas energy development and economic mod-

ernization. Private sector U.S. firms are the lo-

cus of this technology, and they have generallybeen willing to provide it independently of any

U.S. Government programs. But some of the tech-

nology that China needs is not being provided be-

cause U.S. suppliers are not informed about these

needs or because they do not see these as attrac-tive business opportunities. Efforts by the U.S.

Government to further encourage private sector

participation in Chinese energy development

would be viewed positively by the Chinese and

probably contribute to friendly relations. Tech-

nical and management training programs sup-

ported by the U.S. Government, such as the one

in Dalian, are another avenue for positive par-

ticipation.


19/117

14

Among the primary explanations for the diffi-

culty of using technology as a finely tuned instru-

ment of U.S. foreign policy is the fact that the pri-

vate sector rather than the U.S. Government is

the holder of the technology. Export controls, the

major mechanism for controlling the international

flow of technology, have been used to limit cer-tain kinds of U.S. trade with China. But techni-cal exchange and technology transfer are less sus-

ceptible to such regulations. The Governments

ability to manipulate technology transfer to serve

foreign policy goals in particular cases is often

quite limited. However, conditional access to tech-

nology has been used as an element of U.S. pol-

icies toward other developing countries when a

strong consensus exists on a U.S. policy goal (such

as nuclear nonproliferation) and when other sup-pliers have been willing to cooperate.

Our ability to use technology as an instrumentof foreign policy is often dependent on how tech-

nology is packaged with other enabling re-

sources. In the energy area, financing is a particu-

larly important example of the latter. Energy

development in China is a mammoth and

tremely costly undertaking. Helping to finance

costs of this development may be necessary iffull benefits of technology in foreign policy

to be realized.

ex-

th e

th ear e

Over the long term, technology can be an im-

portant asset to U.S. China policies, but perhaps

not a finely honed tool. Government-to-govern-

ment science and technology cooperation agree-

ments, for example, set the stage for technology

transfers by private sector firms. But it is virtu-

ally impossible to isolate the effects of such gov-

ernment policies and programs on Chinas energy

development. In this sense, the transfer of U.S.

energy technologies to China generally supports

(and derives from) increasingly friendly bilateralrelat ions. While the U.S. Government is not

directly involved in m ost of these tran sfers, its pol-icies are nevertheless critical because they set the

parameters for U.S. technology transfer.


20/117

Chapter 3

Energy Technology Transfers


21/117

Chapter 3

Energy Technology Transfers

Chinas present energy shortages appear incon-

sistent with its vast and varied energy resource

base. Some of the shortages can be alleviated by

expanding present capabilities, for instance open-ing more coal mines, but much of the resource

base will be unavailable without improved tech-

nology. Sophisticated techniques are required to

explore for oil and gas offshore or in remote re-

gions. Coal is plentiful, but bottlenecks prevent

enough from reaching the market, and the envi-ronmental impacts of burning large quantities are

severe in some areas. The best potential hydro-

electric sites are far from load centers, requiring

long-distance, high-voltage transmission systems.

Nuclear energy, known to the Chinese through

their military programs, requires a quite differ-

ent approach for power generation. Energy canalso be used much more efficiently.

RESOURCES

Reliable data for Chinas oil and gas reserves

are not available, but much can be pieced to-

gether. Most exploration has taken place in the

northeast corridor, and that is where the giant

fields and 75 percent of the reserves are located.Proved and probable reserves in the northeast are

estimated at 10 to 15 billion barrels.1 Cumulativeproduction has been 10 billion barrels, and addi-

tional discoveries and advanced technology may

add an equivalent amount of oil resources.

Petroleum reserves in the western part of the

country are much less certain because exploration

has been much less intense. Perhaps 3 to 5 bil-

lion barrels will be produced there. Offshore re-

serves are even more speculative because exten-

sive exploration began relatively recently, and

much of the exploration has been disappointing.

Offshore reserves of 20 to 30 billion barrels are

a commonly accepted projection. Thus the ulti-

While China may be capable of developing

these technologies indigenously, the process can

be speeded considerably and made more efficient

by the importation of foreign technology. Muchalready has been imported, and the Chinese have

an intense interest in expanding this access.

This chapter reviews the resources available to

China and present trends in energy production

and consumption. Then the role that technology,both domestic and foreign, might play is evalu-

ated in light of constraints on the Chinese system.

Further detail, and the basis of much of this dis-

cussion can be found in the background paper

Technology Transfer and Chinas Energy In-

du stries.

mately recoverable petroleum reserves are 50 to70 billion barrels. Chinas proved reserves are less

than those of the United States though the poten-

tial for further discoveries is greater.

Known natural gas reserves are only 4.6 tril-

lion cubic feet, a mu ch lower energy resource thancrude oil reserves. However, gas has been a lower

priority fuel because it is difficult to transport

without an expensive pipeline system, and there

is little export market. However, recent offshore

drilling in the South China Sea has resulted in a

commercially exploitable find in the range of 3

to 7 trillion cubic feet. Basins in western China

also show promise of very significant gas re-

sources. These finds may stimulate interest in

building the required infrastructure and search-

ing for more gas.

Coal deposits are gigantic, over 7.50 bil l ion

tons, 2 and may be double that. Actual recover-

able reserves


22/117

18

same class with the United States or the U. S. S. R.,which have the largest in the world, At the present

rate of exploitation, this coal would last hundreds

of years. Most of it is reasonably good quality

bituminous grade. Pockets of coal occur practi-

cally everywhere in the country, but the major

seams are in the central and north central regions,far from the major industrial regions near the

coast.

x

q

SOURCE

Hydropower resources are also huge, poten-

tially as mu ch as 380,000 megawatts (MW).3 Only

22,000 MW have been exploited. About 60 per-

cent of the potential is in the Southwest, a great

distance from population centers.

Figure 1 shows the location of the major energyresources.

Ibid.

Figure 1 .Chinas Energy Resources

Major 011 fields

Proposed major nuclear power facilities

Major coal producing regions

Major hydroelectric projects

Major cities

Office of Technology Assessment


23/117

19

TRENDS IN ENERGY PRODUCTION AND USE

Petroleum

Crude oil production rose rapidly in the 1970sto over 2 million barrels per day in 1979 (the

United States produces 8.6 million). By 1980,however, production flattened out due to the

maturing of the biggest fields and a rapid decline

in one unusual formation. Output in most fields

has now stabilized or is increasing slightly, but

at the expense of ever-increasing water injection

to maintain pressure. Production data are shown

in table 1. The fields that are mature now are ex-

pected to decline in a few years.

This situation has developed largely because of

a lack of exploration. The fields in the northeast

appeared to be so large that little attention was

paid to the rate of depletion and the need to de-velop new fields. Even now that the situation has

been recognized, China is spending only about $2

to $3 billion on oil exploration and development,

about what a moderate size U.S. company would

invest for a tiny fraction of Chinas production.

In effect, China has been producing itself out ofbusiness.

This has led to an extensive reevaluation of pe-

troleum policies in China. The Ministry of Petro-leum Industry has shifted from self-reliance and

is allowing foreign oil companies to participatein offshore exploration. More recently, as the fo-

cus of exploration has shifted to the northwest,

which has a huge potential but harsh conditions,

China has sought help from foreign companies in

seismic surveys and exploratory drilling. Foreign

oil companies may be invited to participate in ex-

ploration and production activities in 10 provinces

south of the Yangtze River under arrangements

similar to the offshore concessions.

Natural Gas

Natural gas production is limited to one basin

in Sichuan and as a byproduct at the major oil-

fields. Production has been declining significantlyas shown in table 2, largely because of a severe

Table 1 .Petroleum Production by Region (thousand barrels/day)

Year

Region 1970 1978 1980 1982 1983 1984

Northeast . . . . 447.4 1,120.8 1,171.8 1,163.8 1,181.0-

1,235.2North. . . . . . . . . . . . . . . . . . . 20.4 408.0 382.2 285.4 270.2 268.8

East . . . . . . . . . . . . . . . . . . . . . 93.4 395.0 358.4 380.6 434.8 547.2Northwest . . . . . 45.8 98.8 121.2 124.0 135.4 141.4Central-South. . . . . . . . . . . . . 5.4 56.6 83.2 84.4 96.0 96.0Southwest . . . . 0.6 21.8 2.0 2.0 2.0 2.0

Total . . . . . . . . . . . . . . . . . 613.0 2,101.0 2,118.8 2,040.2 2,119.4 2,290.6SOURCE China Energy Ventures, Inc

Table 2.Natural Gas Production by Region (trillion cubic feet)

Year

Region 1977 1978 1979 1980 1981 1982 1983

Northeast . . . . . 0.169 0.183 0.189 0.193 0.157North . . . . . . . . . . . . 0.028 0.030 0.034 0.029 0.026East. . . . . . . . . . . . . . . . . 0,043 0.053 0.057 0.053 0.044

Central-South . . . 0.001 0.001 0.001 0.002 0.002Northwest . . . . . . . . . . . . . 0.009 0.011 0.012 0.014 0.016Sichuan . . . . . . . . . . . . . . 0.192 0.224 0.238 0.231 0.212 0.191

Total a . . . . . . . . . . . . . 0.442 0,501 0.530 0.521 0.456 0.434 0.419.

aTotals may not add due to rounding

SOURCE Ministry of Petroleum


24/117

20

undercapitalization (especially in exploration) and

a failure to acquire modern technology compara-

ble to the oil industry. There are few gas pipe-

lines in the country to get the gas to market even

if production can be increased. The gas discov-

ered by ARCO in the South China Sea might beconverted to fertilizer at coastal plants.

Coal

Currently, coal represents 74 percent of Chinas

energy production. While the share is dropping,

actual production has risen fairly steadily at an

annual rate of 7 to 8 percent as shown in table3. Future p rodu ction w ill be a function of the levelof investment in mines, other facilities, and trans-

portation infrastructure. The stated target for 2000is 1.2 billion tons, about double the rate in 1980.

Almost half of this goal would be met by small,local mines, but annual additions to large mine

capacity will have to be 10 to 12 million tons per

year. The mine at Pingshuo in Shanxi Province,

to be developed by the Island Creek Coal Co, (a

division of Occidental Petroleum), will have a ca-

pacity of 15 million tons per year. At present,

almost all mining is underground, but some of the

biggest new mines will be surface mines. Opera-

tions at most coal mines are inefficient. On the

average, less than a ton is produ ced per m an-day,

versus about 10 tons for underground mines in

the United States.

Very little coal (about 10 percent of output) is

cleaned before shipment. In- many mines, non-

combustible matter significantly increases ship-

ping costs and causes problems in boilers whenthe coal is burned. It is likely that beneficiation

(coal cleaning) plants will become more common,

but progress has been slow.

Transportation is a major bottleneck. Coal al-

ready represents about 40 percent of all rail ship-

Table 3.Coal Production (million metric tons)

ments. Many lines are being upgraded, but theprocess is slow and expensive. China intends to

export more coal, which will depend on ports be-ing upgraded in addition to the lines to the ports.

Japan is a natural market for Chinese coal and

is financing mine and port development, but theslumping price of coal on the world market has

redu ced the incentive to make these imp rovements.

Electricity

The electric power industry has been growing

rapidly as shown in table 4. Present total capac-

ity is 81,000 MW, of which 68 percent is from

steam plants (mostly coal) and the rest is hydro-

power. There are six major regional grids andmany small local grids. Twenty-two long-dis-

tance, high-voltage transmission lines have been

built.

4

Others have been announced, including a1,300 kilometer direct current line from Qinghai

to Hebei,

Despite the growth, there is a severe shortage

of electricity. It is estimated that only about 80

percent of the nations industrial capacity can be

operated at any one time because of inadequate

electric capacity.5 The current shortfall is about10,000 MW. At peak consumption hours, somecustomers are cut off or restricted. In addition to

lost production, blackouts can damage equipment.

There are 18 large hydropower stations and

another 11 under construction for completion by1990. The largest potential project, the Three

Gorges on the Yangtze River, could produce

12,000 MW, but it is still in the planning phase.

This project, estimated at $9 to $12 billion, would

4FujikoKitani, Electric Power in China, Ch ina Newdetter, No.56, JETRO.

5Lu Qi, Energy Conservation and Its Prospects, Beijing Review,

No, 46. November 1984.

Table 4.Electric Power Production (billion kWh)

Thermal H ydro Total

1970 . . . . . . . . . . . . . . . . . ...............353.91978 . . . . . . . . . . . . . . . . . ...............617.91980 . . . . . . . . . . . . . . . . . ...............620.11981 . . . . . . . . . . . . . . . . . ...............621.61982 . . . . . . . . . . . . . . . . . ...............666.01983 . . . . . . . . . . . . . . . . . ...............692.01984 . . . . . . . . . . . . . . . . . ...............772,0

1970 . . . . . . . . . . . . . . 95.4 20.5 115.91978 . . . . . . . . . . . . . . 212.0 44.6 256,61980 . . . . . . . . . . . . . . 242.4 58.2 300.61981 . . . . . . . . . . . . . . 243.8 65.5 309.31982 . . . . . . . . . . . . . . 253.3 74.4 327.71983 . . . . . . . . . . . . . . 263.5 84.5 348.01984 . . . . . . . . . . . . . . 289.1 85.5 374.6

SOURCE China Energy Ventures, Inc , and National Council for U S China Trade SOURCE China Energy Ventures, Inc and National Council for U.S.-China Trade


25/117

. .- .

rank among the worlds largest construction proj-

ects. Figure 1 shows some of the major hydro-power sites. There are also over 100 midsized (12

to 250 MW) hydropower stations. China is theworld leader in the development of mini-hydro

plants, with over 80,000. This represents over one-

third of all hydropower capacity, and is an im-

portant part of the rural electrification strategy.

There are about 65 large thermal plants in the

country, mostly in industrial areas. Thermal

power will represent the bulk of additions to the

electric power system for the foreseeable future.

The plants are mostly indigenously built, and they

are significantly less efficient (28 percent) than new

U.S. coal plants (about 40 percent). Powerplants

consume over 15 percent of petroleum supplies,

which is a significant loss of potential exports or

alternative use in the economy.

Projections

Estimated primary energy production through2000 is shown in table 5. These projections arebased on a computer simulation done in early

1984 and are included for illustrative purposes

only. Actual 1984 production for coal was 772

million metric tons an

lion metric tons.

Energy Use

China uses all of tcussed above except

d for petroleum, 114 mil-

he energy production dis-for the export of about

500,000 to 600,000 barrels per day of oil (includ-

ing refined products) and 7 million tons of coal

per year. Much of this use is quite inefficient. Ar-

tificially low energy prices and a shortage of cap-

ital have resulted in a vast amount of equipment

and processes that was not designed to minimize

energy use. It is now clear that demand for energy

services will increase rapidly as the economy andstandards of living rise, but that producing great

amounts of additional energy will be very expen-

sive, polluting, and in some cases, impossible.

Therefore, to meet economic goals, increasing the

efficiency of energy use will be necessary.

In the 1970s, China launched a major programto increase efficiency and conserve energy, a sig-nificant departure from past practices. This pro-

21

gram has had considerable success, saving the

equivalent of several tens of million tons of coal

each year (cumulative). Further conservation willrequire increasing investment as the easy meas-

ures are taken, but it is likely that saving energy

will be at least cost competitive with producing

energy for many years.

In the industrial sector (which uses 72 percentof Chinas total primary energy), only about 40

percent of the energy is converted to useful serv-

ice. Improving this record would have a double

benefit: reducing the cost of production and free-ing the energy for other purposes. Prioritization

of energy allocation is an important inducement.

The most efficient plants are assured a supply of

energy, while the least efficient ones are closed

in times of shortages. Not only does this mean

the most efficient plants operate the longest, but

it provides incentives for plant managers to fixtheir problems. Fuel switching from oil to coal is

also encouraged to reduce energy costs, especiallyin facilities that changed from coal to oil in the

1960s and 1970s. So far, however, conversion has

been slow, as it has been in the United States. Im-proved energy management is another priority,

using audits, energy measurement instruments,

and analysis to identify conservation opportuni-

ties. Old equipment and plants are being reno-

vated (e. g., with insulation or air preheater) or

even replaced to achieve large savings. Cogener-ation and residu al heat recovery are being emp ha-

sized. The recent emp hasis on light indu stry is alsohelping slow the growth rate of energy demand.

The comm ercial/ residential sector used on ly 14

percent of Chinas total commercial energy. Coal

is the major fuel for cooking and heating. In ru-

ral areas, noncommercial fuels (wood, crop by-products, biogas) are very important, but it is pos-

sible that this dependence will drop as incomes

rise and more convenient fuels become available.

In any event, neither technology nor equipment

is likely to be exported by the United States. One-

third of the peasants have no electricity.sIt is a

national goal to electrify all rural villages by 2000.

Energy Conser\ ration, The China Business Reviet \ r, lanuaryFebruary 1982, p, 12.

Ibid., p. 18.Ql, op . c i t . , p, 20.


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22

Table 5. Projected Primary Energy Productiona

Coal

Baseline PlanYear (mmt) (mmt)

1975 . . . . . . . . . . . . (484)1980 . . . . . . . . . . . . (620)1983 . . . . . . . . . . . . (692)1985 . . . . . . . . . . . . 743 7001990 . . . . . . . . . . . . 821 8501995 . . . . . . . . . . . . 895 1,0002000 . . . . . . . . . . . . 966 1,200

Crude petroleum Natural gas Hydropower Total energy

Baseline Plan Baseline High Baseline Plan Baseline Plan(mmt) (mmt) (bcm) (bcm) (bkWh) (bkWh) (mmtce) (mmtce)

(77) (9) (47) (472)(106) (14) (58) (620)(106) (12) (84) (671)109 117 12 14 100 713 698115 132 12 19 123 140 771 838122 156 16 27 175 210 847 999131 210 21 38 228 30 0 92 4 1,245

aThese projections are based on a computer simulation done in early 1984 and are included for illustrative purposes only Actual 19&l production for coal was 772mmt and for petroleum, 114 mmt

SOURCE China Energy Ventures, Inc

In the transportation sector, demand for liquid part to reduce fuel consumption. This one stepfuels is expected to rise rapidly. Railroads are be- is estimated to save 60,000 barrels of fuel pering electrified, but th e increasing n um ber of diesel year. locomotives, automobiles, airplanes, trucks, and

buses will put considerable pressure on the oil in-

dustry. The Ministry of Transportation is retrofit- Refit Gives More Power to Old Trucks, China Daily, Mar.

ting most of the older en gines in its trucks, in large 14, 1985, p. 2.

TRENDS IN ENERGY TECHNOLOGY TRANSFER

Technology acquisition has been a central fea-ture of Chinas energy programs for many years,

but until 1980, direct sales of equipment and even

entire factories were far more imp ortant than tech-

nology tran sfer. In some cases, China tried reverse

engineering (reproducing a finished product with-

out access to design and manufacturing informa-

tion, such as was done with oilfield equipment).Many of these efforts were not very successful

though some products are being used. The Chi-

nese petroleum industry, at least, has decided it

is less costly and more effective in the long run

to procure technology directly.

Petroleum Exploration and Production

The offshore oil exploration projects have stim-

ulated petroleum technology transfers, includingtraining, joint technical services, and joint man-

agement. Many of the smaller U.S. oilfield serv-

ice companies are now participating. Contracts

for licensing to manufacture equipment have been

rare for offshore technology production, largely

because the market is limited (only 19 rigs were

active in 1984, and this number will not grow inthe next year or two).

The situation is reversed onshore, where for-

eign participation has been limited to specialized

services and equipment supply. Onshore activ-

ity is much greater, with about 800 to 900 active

rigs. All of Chinas production has been onshore.Licensing arrangements have been more attrac-

tive than for offshore technology, especially as

a way of gaining access to the market. The prime

example is the drill bit factory established under

a licensing contract by the Hughes Tool Co. Hugheswas paid a fee for the transfer and still receives

royalties for the production. In addition, it is al-

lowed to sell large quantities of U.S.-made drill

bits in China because far more are needed than

the factory can supply (although some appear to

have been exported).

The total commercial value of technology trans-

fer and training programs in the 1980-85 period

is estimated to be $100 to $125 million. While this

may appear small compared to the $1 billion spent

by foreign companies for exploration offshore, or


27/117

23

th e $250 million imports of equipment and serv-ices for the onshore market in 1984 alone, the

technology transfer component has major long-

term implications. Furthermore, contracts signed

but not yet implemented are not included, and

there are many contracts being negotiated, a long-

term process itself, Estimated values for the next5 years are $500 to $900 million, as shown in table

6. Key items are likely to be:

advanced geophysical technology such as

seismic equipment and computer hardware

and software;

manufacturing technology for land drilling

rigs, downhole completion equipment, and

pressure control equipment;

steam injection and enhanced recovery tech-

nology; and

instrumentation.

U.S. companies will be in a strong position tocompete for this business (which may diminish

in the 1990s as the Chinese increasingly masterthe technologies). The Chinese are also particu-

larly interested in technology to meet materials

requirements for the manufacturing capabilities

they are purchasing, such as high-grade metal-

lurgy, specialized rubber, and other elastomers.

It should be noted that all these basic materials

technologies have military as well as energy ap-

plications.

Petroleum Refining andPetrochemicals

China is a net exporter of refined petroleum

prod ucts, includ ing $300 million of gasoline to the

United States in 1984. 0 The need to earn addi-

IOThismay dr op to zero next year because the phasing out of leadin U.S. gasoline makes the low octane Chinese gasoline useless even

for blending. The Chinese are likely to resent the loss of a major

market.

tional foreign exchange (which is crucial to the

purchase of more foreign technology to continue

the modernization program) is a strong motiva-

tion for accelerated technology acquisition to im-

prove refineries. Import substitution is the moti-

vation in the case of petrochemicals and fertilizer.

China spends about $2 billion annually in foreignexchange on these items.

Licenses for chemical processes are now increas-

ing because SINOPEC, the corporation with con-

trol over Chinas refineries and related facilities

is engaged in a $3 billion refinery modernization

program. If production of offshore oil starts, con-

struction of coastal refineries is likely, possibly

under joint management or even as joint ventures.

The worldwide glut of refining capacity argues

against any near-term construction of much ad-

ditional capacity, however. License agreements

have been signed for the manufacture of variouspieces of equipment for chemical plants, but the

combined value of the licenses is probably only

about $5 million, 11 Specific techn ologies of int erest

include:

q

q

q

u.

second ary refining technology, such as hyd ro-

crackers;

process licenses for specialized petroleum

products, pesticides and agricultural chemi-

cals, and synthetic materials such as elas-

tomers; and

engineering and construction technology for

plant design and pipelines.

S. companies have a long record of involve-

ment in this-area of the Chinese market. They are

likely to make significant sales, perhaps $50 to$100 million over the next 5 years, not includingsales of equipment.

Ilwoodard, op. cit . , P. 16.

Table 6.Estimated Values of U.S. Technology Transfer to Chinaa

1973-80 1980-85 1986-90

Petroleum exploration and production . . . . . . . . . . . . . . . . . . . . . . . . marginal $60-70 million $300-500 millionRefining and petrochemicals . . . . . . . . . . . . . . . . . . . . ... ... ... .. .$15-20 million $15-20 million $ 50-100 millionCoal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . marginal $10-15 million $ 50-100 millionElectric power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . marginal $20-25 mill ion $100-200 mill ion

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... .$20-30 million $100-125 million $500-900 millionaEstimated values, do not necessarily total Includes only money actually spent by China or its foreign Companies on technology transfer and training during periodsin question.

SOURCE: China Energy Ventures, Inc


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24

Coal Mining and Transportation

China produces almost as much coal as the

United States, but its coal mining technology con-

tinues to lag, U.S. companies are becoming in-

volved in every level of the Chinese coal indus-

try including large mine development, engineering

contracts for mines and transportat ion, andlicenses for mining and beneficiation equipment.

U.S. technology transfer for coal development

has generally lagged behind that for oil, despite

the considerably greater importance of coal in

Chinas energy system. This is because coal ex-

ports create relatively small foreign exchange

earnings ($500 million in 1984, or 10 percent ofthe earnings from oil exports) and because coal

technology is not as esoteric. Another reason for

delays in coal technology transfer is that the

mimes that will be opened by U.S. companies are

the subject of protracted negotiations, as is muchof the foreign investment in China.

Meeting the goal of 1.2 billion tons of coal by

2000 will require an expansion of capacity of

about 50 percent or about 30 million tons per

year, On the average, at least one very large mine,

several medium-sized ones and a lot of small lo-

cal mines must be added each year, as well as a

vast infrastructure of beneficiation plants, trans-

portation systems and port facilities. Technologies

that are already being imported or discussedinclude:

q engineering for large open-pit mines;c slurry pipelines and unit trains;. mine safet y technology;

. manufacturing licenses for equipment; and

q beneficiation technology,

U.S. companies have an edge on surface min-ing and short wall und erground m ining equipment

and beneficiation plants. Most long wall miningequipment is still made in Europe. Total value of

technology transfer from the United States over

the next 5 years may be $50 to $100 million.

Electric Power

U.S. technology transfer in the electric sectorhas been concentrated in a few large contracts for

modern generator and boiler technology, These

licensing contracts are intended to improve the

efficiency an d increase the size {from 250 to as

much as 600 MW) of Chinas standard generat-ing plant. China has also begun importing elec-

tric transmission technology from U.S. firms, and

this is likely to increase as the voltage of the lines

increases. Important technologies are likely to

include:

boiler retrofits and other thermal efficiency

technology;design and engineering technology for large

powerplants and particularly for hyd ropower

stations (and also tidal powerplants);

high-voltage transmission and switchgear

and control systems; and

pollution control equipment.

U.S. companies will be competitive in these

markets. Total value could be $100 to $200 mil-

lion from 1986 to 1990. Nuclear power technol-ogy is also a possibility that is covered in the nextchapter of this technical memorandum.

Conservation

Technologies to improve the efficiency of en-

ergy use can be sold in their own right or as part

of a larger package, such as a steel mill, a power-

plant, or an oil refinery. The largest gain in effi-

ciency comes when a completely new plant isbuilt, incorporating the best of modern technol-

ogy. This is also a very capital-intensive approach

which normally cannot be justified simply on thegrounds of energy efficiency. As demand for pro-

duction increases, however, new manufacturing

facilities will be required, and average efficiency

will improve, but most gains in the near-term will

come from retrofits, Chinas program to increase

efficiency has had considerable success, but afterthe easy housekeeping measures (simple insula-

tion, adjusting combustion conditions, cleaning

steam traps, etc. ), identifying opportunities and

implementing solutions becomes much more dif-

ficult and costly. This next stage of energy con-

servation may provide many opportunities for the

sale of equipm ent and the transfer of technologies.Some of the technologies are:

q monitoring equipment;

q air preheater and heat recuperators;

q process controls;


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q

q

q

q

q

cogeneration equipment;high efficiency motors and pumps;

energy management techniques and systems,including instrumentation and control equip-

ment;

energy auditing techniques and analysis; and

high efficiency lighting.No estimate is available for the potential value

of such technology transfer because it covers such

a wide range, and each sale might be relativel ysmall. In some cases no single company has

enough vested interest in the technology to war-rant marketing it in China, or there is no clear

customer. In many of the industrial applications,

however, U.S. companies would be competitive,

25

company is discussing the possibility of setting up

a manufacturing plant in China. Other solar tech-nologies are either not competitive or are already

being implemented in China (e.g., flat-plate col-

lectors). The technology that has been developed

in the United States over the past 10 to 15 years

would probably be helpful, but it is not clear ifit will be economical for industry to provide it

to China. This may suggest a greater role for the

Department of Energy. China is also exploring the

possibility of tapping its geothermal resources.

This could be a significant area in the future, since

the United States has done considerable R&D as

well as limited exploitation.

Solar

The only solar technology that is likely to be

at all significant is photovoltaics. At least one U.S.

CHINAS PROBLEMS WITH TECHNOLOGY TRANSFER

The discussion above ind icates Chinas need for

foreign energy technologies, and its intense drive

to acquire technology. Chinas ability to choose

technologies wisely, assimilate them, and diffuse

them are also questions which have concerned stu-

dents of technology transfer to China. These aregermane questions in light of Chinas modern

historyits quest for technology since the 19thcentury, its concerns about the corrupting influ-

ences of foreign material culture which accompa-

nied that quest, massive technology imports from

the Soviet Union wh ich occurred in the 1950s, and

the confused technology policies of the govern-

ment in the post-Mao period.

Finance

In comparison to other developing countries

which are recipients of transferred technology,

China has both distinctive advantages and dis-

advantages in dealing with technology from theinternational economy. First, as noted elsewhere

in this memorandum, China is in a relatively

favorable position in terms of its foreign exchange

holdings, and has in its energy resources for ex-

port a source of foreign exchange earnings (the

latter accounts for 20 percent of Chinas foreign

exchange earnings). But Chinas energy needs are

so great that it is difficult to find the necessaryfinancial resources. Foreign exchange reserves

could be dissipated quickly with major purchases(e.g., nuclear powerplants), and the uncertainties

of the export potential of the energy industry forthe remainder of the century in the face of rising

domestic demand induces caution in the use of

foreign exchange.

Chinas energy sector remains severely under-

capitalized in spite of the fact that it receives 45

percent of industrial investment. This affects

Chinas ability to solve the technological needs

of its energy sector through technology transfer.

While the energy industry is a foreign exchange

earner, rep ortedly only 10 percent of the foreign

exchange it generates is reallocated to the energy

sector for its foreign procurement uses. Thus,

financing is an important constraint on energy d e-velopment, but it is one with a differential im-pact. Chinese investment decisions favor foreign

exchange earners, and exportable energy sourcesoil and coalalso have attracted private funds


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26

I

~

I

I

,I

I

I

from abroad. Financing is a greater constraint in

the electric and hydropower areas, where the Chi-

nese have sought and are receiving concession-

ary loans from abroad.

Manpower

A second constraint facing many developingcountries is a shortage of technical manpower,

and a lack of a scientific tradition. These prob-

lems affect a countrys ability to absorb foreign

technology. China does have something of a man-

power problem, and it also has technology ab-

sorption problems in the energy sector. Yet in

absolute terms, China has a large pool of scien-

tists and engineers (over 2 million). 2 Even though

the quality of training received by those in thepool varies a great deal, and the distribution of

talent by region and economic sector is unbal-

anced, China does have a cadre of technical

specialists to facilitate technology transfers.

China is also rapidly expanding the technical

manp ower ranks through its own new ed ucational

policies, and by taking full advantage of educa-

tional and training opportunities offered abroad

by institutions of higher education, companies,

and foreign governments. Thus, while manpower

inadequacies do appear in the context of technol-

ogy transfers, China is also preparing itself for

assimilating technology and benefit ing fromlearning curve effects.

In contras t to many developing countr ies ,China has an established energy industry, and an

extensive R&D network. Thus, in the energy area,

all sectors have research, design, and educationalinstitutes which typically have more tha n 25 yearsof experience. Many of these had experience with

technology transfers from the Soviet Union in the

1950s, and all of them had experience with tech-nological self-reliance since 1960. This R&D sys-

tem was terribly disrupted during the Cultural

Revolution, and its capabilities were reduced. But

it is important to recall the evolution of this sys-

tem since 1949, and the many achievements it has

made. It is a significant resource which should aid

IZ S eeLeo A, Orleans, The Training and Utilization of scientificand Engineering Manpower in the Peoples Republic of China, U.S.

House of Representatives, Committee on Science and Technology,

October 1983.

China in assimilating foreign technology, and

avoiding technological dependency. Chinas tech-

nology absorption problems, thus are likely to be

short-term problems; its technical community is

extant and must be brought up to world levels.

It does not have to be created de novo.

Ironically, the existence of an established energysupply industry and R&D system at times works

against technology transfer. The domestic indus-

try has a vested interest in domestic supply, and

thus China is faced with make or buy questions

which would not trouble other developing coun-tries. In addition, Chinas domestic industry h as

had trouble converting the results of its research

into serially produced new products. Moreover,

there has been a resistance to innovation on thepart of Chinese managers. These problems, and

the more general relative technological backward-

ness of the domestic industry, provide opportu-

nities for the foreign suppliers of technology atthe present time. It is likely, however, that effec-

tive international technology transfers will alsostimulate the domestic industry to improve its ca-

pacity for indigenous innovation.

Internal Transfers

The question of how effectively foreign tech-

nology is diffused within China remains uncer-

tain. Foreign firms have been concerned that tech-

nology licensed to one enterprise may illicitly be

transferred to another, in the absence of effective

patent protection. Chinas new patent law andother recent policies designed to encourage tech-

nology transfer, should help alleviate some of

these concerns. A separate question, however, is

the capability of the Chinese system for internal

technological diffusion.

Chinese organizational life is excessively bu-

reaucratic and compartmentalized. The Chinese

themselves often lament what they refer to as

departmentalism. The result of these organiza-

tional characteristics is that there is often little ef-

fective horizontal, interorganizational communi-

cation. Instead, communications follow the strongvertical orientations according to which Chinese

organizations were designed.

The Chinese have attempted to overcome these

features by creating mechanisms for cross-cutting


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technological comm un ications. The first of theseare the professional societies organized around

academic disciplines and industrial technologies.The professional societies, uniquely, draw indi-

viduals from different vertical systems (different

ministries, academies, and universities) into a

common forum. A second mechanism is a net-work of scientific and technical information serv-

ices that have been established, the development

of which has been aided since 1979 by coopera-

tion with the U.S. National Technical Informa-

tion Service. In add ition to these tw o m echanisms,

in recent years, a large number of technical con-

sulting organizations have been formed, and other

organizations, including production enterprises,

universities, and research institutes, have been ac-

tive in establishing consultancies as well. Recent

policy has also sanctioned individual consulting.

Thus, while the formal structure of the Chinese

economic and research systems works to inhibit

the diffusion of technology and ideas, the climate

for the domestic supply of technical services and

the diffusion of technology has improved mark-

edly in recent years. Thus, the likelihood th at

Chinas investment in foreign technology w ill havemore of a payoffwith advanced technology fil-

tering out through the economyis now greater

than would have been the case in the immediate

past.

Decision making

Decisionmaking is another constraint on effec-

tive technology transfer experienced by develop-

ing countries, and China too has its share of deci-

sionmaking problems. For instance, there has not

always been good coordination among centralministries in the energy sector, and between deci-

sionmakers in Beijing and those at the provincelevel. Decisionmakers in Beijing making purchas-

ing decisions about foreign technology have not

always had a good understanding of the techni-

cal problems in the field. Perhaps most impor-

tantly, Chinas economic system has over the

years structured incentives in such a way thatdecisionmakers are often risk averse. Individuals

have been unwilling to make decisions without

collective consensus. The resulting delays in de-cisions are costly to foreign companies who face

2 7

high daily expenses to maintain representatives

in China.

The current economic reforms promise some

improvement in decisionmaking, however. In an

effort to put Chinas energy industry on more of

a business-like footing, management has in many

cases been removed from government ministriesand vested in new corporate entities, such as theChina National Oil Development Corp., which

in principle, are to run as profit-making organi-

zations. Efforts are being made throughout the

government and the economy to promote youn-

ger, more technically qualified and more entre-

preneurial individuals into managerial positions.

The mechanisms for horizontal technical commu-

nication, noted above, also serve to aid in Chi-

nese decisionmaking. It seems to be the case now,

although this was not true in the late 1970s, that

decisionmaking about what types of technology

to import is informed by some of the best techni-

cal judgments available in China. This is largelya result of the growth of consulting and advisory

services.

This is not to say, however, that such decision-

making is now problem free. The best technical

judgments do not necessarily result in the most

appropriate technology decisions, and it does

seem to be th e case that the full integration of tech-nical, economic, and political criteria remains

something of an ideal. Chinas increasing exp osureto the international economy, and particularly to

international organizations, has now sharpenedthe Chinese sense of the importance of project

planning and analysis, and efforts have been mad e

by both the Chinese themselves, and with the

assistance of organizations like the World Bank,

to strengthen central analytic capabilities, and ca-

pabilities for coordinated decisionmaking, on

technology transfer decisions.

The current economic reforms should improve

Chinas ability to absorb and diffuse technology

in other ways as well. Technology as an economic

concept has undergone a fundamental change in

Chinese thinking. Whereas in the past it wasregard ed as a free pu blic good, wh ich in a socialist

society is available to any an d all, technology nowis regarded as a commodity to be bought and sold

through market transactions. The Chinese hope


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28

that this new conception of technology will pro-

vide better incentives for those who produce tech-

nology, and will make those who would procure

and use it, more conscious of its economic value.More effective internal technology transfers, and

sharper macroeconomic decisionmaking are ex-

pected.

Conclusion

On balance, in spite of financial, manpower,

and decisionmaking problems which limit its abil-

ity to procure and assimilate technology, China

also has capacities which make these limitationsless of a problem than they have been in other

developing countries. These include an expand-ing pool of trained personnel, an established

energy industry with an extensive R&D system,

and new policies to encourage foreign investment

and technology transfer, as well as those for eco-

nomic, administrative, and educational reform,

which seem appropriate for Chinas current needs.

Whether these policies will succeecl and whether

the associated political and social costs can be

managed are major uncertainties.Chinas leaders, however, have incentives to

maintain an environment favorable to technol-

ogy transfer and absorption. Chinas rate of eco-

nomic growth for the remainder of the century

will be constrained by energy production, yet the

ability to maintain political support for the pol-

icies of modernization and reform is to a large ex-tent a function of economic performance. Im-

proving performance through the use of foreign

technology thus has great domestic political sig-nificance for Chinas current leaders.


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Chapter 4

Nuclear Power and the ProposedCooperation Agreement


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32

Chinas ability to operate civilian nuclear re-

actors safely and reliably is, of course, untested.

While general industrial